ABA Consumer Protection Update June 2007

1. ABA Consumer Protection UpdateJune 2007 Daniel S. Savrin Melissa G. Liazos Bingham McCutchen LLP

2. Agenda • Federal Trade Commission Update • State Attorneys General Update • Lanham Act False Advertising Cases Update • Private Litigation Update • National Advertising Division Update

3. 1. FTC Update • Final Consent Order Approved in Sony BMG Embedded Software Case • Final Consent Order Approved in Adware Case • FTC Obtains TRO in Extortion Scheme Aimed at Hispanics • FTC Complaint Charging Recurring Fraudulent Telecom Services Scheme • FTC Complaint Filed Alleging Illegal Pyramid Scheme • FTC Settlement of Greeting Cards Business Opportunity Scheme

4. 1. FTC Update (cont.) • FTC Testimony on Protecting Consumers from Identity Theft • FTC Testifies on Consumer Credit Reports, FACTA progress • FTC Chair Testifies on Consumer Financial Services Industry; Study Released • Upcoming FTC Summit on Spam

5. Final Consent Order Approved in Sony BMG Embedded Software Case Matter of Sony BMG Entertainment, FTC Docket No. C-4195 • FTC charged Sony BMG with violating federal law when it sold CDs without telling consumers that they contained software that limited the devices on which the music could be played, restricted the number of copies that could be made, and contained technology that monitored their listening habits to send them marketing messages; software also exposed consumers to significant security risks and was unreasonably difficult to uninstall. • Settlement requires Sony BMG to clearly disclose limitations on consumers’ use of music CDs, bars it from using collected information for marketing, prohibits it from installing software without consumer consent, and requires it to provide a reasonable means of uninstalling that software. • Settlement also requires that Sony BMG allow consumers to exchange the CDs for CDs that are not content-protected, and reimburse consumers up to $150 to repair damage to their computers incurred in trying to remove the software.

6. Final Consent Order Approved in Adware Case Matter of DirectRevenue LLC, FTC Docket No. C-4194 • Large adware distributor used unfair and deceptive methods to download adware onto consumers’ computers and obstruct them from removing it, violating federal law. • DirectRevenue and affiliates offered consumers free content and software without disclosing adequately that downloading them would result in installation of the adware. Some affiliates also exploited security vulnerabilities in Web browsers to install the adware. • Settlement bars future downloads of DirectRevenue’s adware without consumers’ express consent, requires DirectRevenue to provide a reasonable and effective way for consumers to locate and remove adware and requires DirectRevenue to give up $1.5 million in ill-gotten gains. • Dissenting statement from Commissioner Jon Leibowitz that $1.5 million amount was “disappointment” because defendants had more than $20 million in profits.

7. FTC Obtains TRO in Extortion Scheme Aimed at Hispanics FTC v. Tono Records, dba Tono Music et. al., U.S. Dist. Ct., Cent. Dist. of Calif., C.A. No.: CV07 3786JFW (RCx); FTC File No.: 072 3012 • Defendants sold English-language instruction course advertised on Spanish-language TV and defendants’ Web sites stating that it was free, but inquiring consumers were told that a shipping and handling fee of $100 to $169 applied. • Defendants then posed as third-party debt collectors, told consumers (many of whom had obtained the English-language course) they owed money, and repeatedly called them, even though was no evidence that they owed money. • Defendants charged with violating the FTC Act and FDCPA. • June 14, District Court judge ordered ex parte TRO freezing the defendants’ assets.

8. FTC Complaint Charging Recurring Fraudulent Telecom Services Scheme FTC v. IFC Credit Corp., U.S.D.C., N.D. Ill., C.A. No. 07C3155, FTC File No. 062 3175 • FTC won case in 2005 against NorVergence Inc., which signed contracts with small business and non-profits for long-term rental of device that NorVergence falsely claimed would lead to savings on phone and Internet services. • NorVergence went into bankruptcy; IFC Credit purchased NorVergence rental agreements valued at $21 million; customers allegedly continued to make payment but received little or no services, and IFC continued to accept new rental contracts and demand payment. • IFC charged with misrepresenting that consumers have no defenses to payment; harming consumers by unfairly accepting and collecting on the rental agreements; and unfairly filing debt collection lawsuits in courts far from consumers’ locations.

9. FTC Complaint Filed Alleging Illegal Pyramid Scheme FTC v. BurnLounge, Inc., U.S.D.C., Cent. Dist. of Calif.; FTC File No. 062 3201 • FTC alleges BurnLounge, Inc. sold opportunities to operate on-line digital music stores that was in fact an illegal pyramid scheme. • BurnLounge recruited participants by selling them “product packages,” ranging from $29.95 to $429.95 per year. Compensation program primarily provided payments to participants for recruiting new participants, not for sale of products or services. • Complaint alleges that defendants operate an illegal pyramid scheme, make deceptive earnings claims, and fail to disclose that most consumers who invest in pyramid schemes don’t receive substantial income, but rather lose money. • FTC asked court to halt deceptive practices and misrepresentations and freeze defendants’ assets pending trial. • PI hearing held June 26; parties negotiating stipulated PI

10. FTC Settlement of Greeting Cards Business Opportunity Scheme FTC v. Richardson, U.S.D.C., N.D. Ala., C.A. No. CV-06-5-4754-NW, FTC File No. 062 3221 • Thomas E. Richardson sold greeting card business opportunities, representing that for investment of $8500 or more purchasers would get everything needed to start business and could earn up to $65,000/year. • No one made more than $2006/year, purchasers did not receive promised number of locations, and Richardson did not provide disclosures required by Franchise Rule. • Settlement bars Richardson from making false earnings claims, using shills, misrepresenting the profitability of secured locations, and prohibits him from violating the Franchise Rule or Business Opportunity Rule. • Order enters a judgment of $901,402.89, the total amount of money consumers paid, minus any refunds given. Judgment suspended based on sworn financial disclosures due to inability to pay.

11. FTC Testimony on Protecting Consumers from Identity Theft • FTC testimony before House Committee on Ways and Means, Subcommittee on Social Security that to prevent ID theft, government and businesses should collect only information that is necessary to meet clear legal or business needs, protect the data they do collect, and improve authentication techniques. • Presidentially-appointed ID Theft Task Force has made five recommendations on ways to improve government’s activities in this area: • Reduced use of Social Security Numbers (SSNs) by agencies. • Restricting, concealing, or masking SSNs in employee records. • Development of “best practices” for minimizing the use and display of SSNs. • OMB should complete analysis of survey of agency uses of SSNs. • Work with state and local governments to explore ways to eliminate unnecessary use and display of SSNs.

12. FTC Testifies on Consumer Credit Reports, FACTA progress • FTC testimony before House Committee on Financial Services on efforts to improve the accuracy of credit report information and enhance consumers’ ability to dispute and correct inaccurate information. • FTC and other agencies have completed most of the Fair and Accurate Credit Transactions Act of 2003 (FACTA)-mandated rules, guides, forms, and notices. • FACTA aims to reduce identity theft and help consumers respond; FTC therefore initiated identity theft education program last year (“Deter, Detect, Defend”) and recently helped launch a new Web site (www.idtheft.gov) to serve as centralized government clearinghouse on ways to prevent and detect identity theft and help victims recover.

13. FTC Chair Testifies on Consumer Financial Services Industry; Study Released • FTC Chair Majoras testified before the House Financial Services Committee on the FTC’s efforts to combat unfair, deceptive, and other illegal practices in consumer financial services industry. • FTC jurisdiction limited to nonbank financial companies, including nonbank mortgage companies, finance companies, and mortgage brokers, who originate 70% of mortgage loans. • FTC brought 21 actions in mortgage lending industry in past decade, returned $320 million to consumers.

14. Majoras Testifies on Consumer Financial Services Industry; Study Released (cont.) • FTC released study. Pertinent points of the study include: • Recommendations for improved disclosure of mortgage costs to consumers. • Development of prototype forms with more comprehensive and straightforward disclosures.

15. Upcoming FTC Summit on Spam • FTC To Host "Spam Summit: The Next Generation of Threats and Solutions" in DC on July 11-12 • Will bring together experts to explore consumer protection issues surrounding spam, phishing, and malware. • Numbers of unsolicited emails rising, especially from “botnets,” which are networks of hijacked personal computers that spammers use to conceal their identities and send spam and viruses. • Spam also being used increasingly as a vehicle for launching harmful downloads, such as phishing and malware, which can result in significant harm to consumers' computers and to Internet stability.

16. 2. State Attorneys General Update

17. Further Agreements, Settlement in Investigations Into Conflicts of Interest in Student Loan Industry • Nationwide investigation into conflicts of interest in student loanindustry, involving loan companies providing consulting payments, tuition fees, gifts, etc. to student loan officers, in exchange for marketing promotion and other support. • National City Bank, Regions Financial Corp., and Wachovia Education Finance reached settlement with NY AG, agreed to abide by NY AG’s recently-codified Code of Conduct. • Similar code being considered in U.S. Congress: House passed Student Loan Sunshine Act, 414-3, 32 Attorneys General have urged the Senate to enact as well. • 26 schools and nation’s top 6 lenders have reached agreements with NY AG; agreed to give more than $11.2 million to national fund to educate high school students and families about financial aid process and $3 million in reimbursements to students.

18. Student Loan Industry (cont.) • NY Code of Conduct includes: 1. Lenders cannot give anything of value to any college in exchange for any advantage; prohibits "revenue sharing" arrangements. 2. Ban on payments for “preferred lender” status. 3. Gift and trip prohibition from lenders to college employees. 4. Lenders cannot pay college employees anything of value for serving on lenders’ advisory boards. 5. Employees of lenders must not identify themselves to students as employees of colleges (e.g., via call centers), and may not work in or provide staffing assistance to a college financial aid office. 6. Lenders must disclose to school range of rates charged to students, number of borrowers at each rate, and the lender’s historic default rate at the school. 7. Lenders must disclose loan resale agreements to students and their parents.

19. Student Loan Industry (cont.) • Also settlement with Johns Hopkins: director of student financial services at JH allegedly received more than $65,000 from Student Loan Express in payments in exchange for marketing promotion and other support, as well as payments from other lenders. • $1.125 million settlement: $562,500 to NY AG’s national education fund, and $562,500 to Maryland AG for similar fund. • Also requires monitoring by NY and MD AGs for 5 years; centralization of financial aid operations; more robust conflict of interest screening of aid employees; and requirement that all preferred lender lists be approved by committees of at least 3 people and person outside financial aid office who reports to Univ. president.

20. States Seek to Investigate Potential Consumer Protection Law Violations Despite “National Security” Claim In re National Security Agency Telecommunications Records Litigation, U.S.D.C., N.D. Cal, C.A. No. M:06-cv-01791-VRW. • NJ AG, others subpoenaed ten telecommunications companies in May 2006 after published reports indicated that telephone companies were turning over telephone calling records to the National Security Agency without warrants or judicial oversight. • Subpoenas sought to determine what information was provided to the NSA, what subscriber policies were in effect, how the records were disclosed to the federal government, whether the records were obtained pursuant to a court order or search warrant, and whether there had been a violation of NJ’s Consumer Protection Act.

21. States Seek to Investigate Potential Consumer Protection Law Violations Despite “National Security” Claim (cont.) • Companies refused to respond, US filed motion to quash in federal court on national security grounds. • Consolidated in MDL in N.D. Calif.; CT, ME, MO and VT are also defendants. • New Jersey filed MTD, heard in June; argued that the United States cannot file suit in federal court to preclude a state’s chief law enforcement officer from asking for information necessary to enforce New Jersey law, and that the legal dispute belongs in state court, rather than federal court, because the Justice Department sought to block a state investigation.

22. Massachusetts Adopts Emergency Foreclosure Regulations • Massachusetts AG adopted emergency regulations, effective immediately, to prohibit engaging in “foreclosure rescue transactions” for-profit or providing foreclosure-related services for an advance fee. • Response to increasing number of home foreclosures. due in large part to increased number of sub-prime mortgages. • Also seeking comments on possible expanded mortgage broker and lender regulations, to potentially include purchase money mortgages and refinances in regulations, a prohibition on loans unless lender reasonably believes that borrower can repay, a limitation on no- or low-documentation loans and adopting a borrower suitability standard.

23. NYAG Settlement in Online Auction Fraud Case • Charged EMH Group, LLC, one of nation’s largest jewelry auction companies, with listing items on eBay and having employees illegally place shill bids to drive up the prices of “no reserve” auctions. • Employees placed over 232,000 such bids worth $5 million. • EMH Group and principal Ezra Dweck agreed to pay more than $400,000 in restitution and penalties, not engage in online auctions for 4 years, and agree to monitoring if resumes online auction business.

24. 3. Lanham Act False Advertising Cases Update

25. 11th Circuit Adopts Five Factor Test for Prudential Standing for Lanham Act False Advertising Claim Phoenix of Broward, Inc., ex rel. Burger King Franchisees v. McDonald's, 2007 WL 1791886 (11th Cir. June 22, 2007) • Burger King franchisees challenged representations by McDonald’s in ads that all who participated in McDonald’s promotional giveaways had a fair and equal chance of winning, even though FBI had told McDonald’s that there was a problem with the distribution of game pieces, and $20 million in game pieces were diverted by employees of company that ran promotions. • Adopts five factor test for prudential standing to bring a false advertising claim under § 43(a) of the Lanham Act set forth in Conte Bros. Automotive, Inc. v. Quaker State-Slick 50, Inc., 165 F.3d 221 (3d Cir. 1998). • Affirms district court's dismissal of Phoenix’s claim for lack of prudential standing.

26. Phoenix (cont.) • Adopted five-factor test for prudential standing: (1) Nature of the plaintiff's alleged injury: Is the injury of a type that Congress sought to redress in providing a private remedy for violations of the Lanham Act? (2) Directness or indirectness of the asserted injury. (3) Proximity or remoteness of the party to the alleged injurious conduct. (4) Speculativeness of the damages claim. (5) Risk of duplicative damages or complexity in apportioning damages. • Court found that it was a close question, but on balance factors weighed against prudential standing.

27. Other Lanham Act False Advertising Cases Morton Grove Pharmaceuticals, Inc. v. Nat’l Pediculosis Ass’n, 2007 WL 1773192 (N.D. Ill. June 18, 2007) • Defendant was a non-profit, plaintiff alleged that plaintiff and defendant were in competition, that almost all of defendant’s revenues came from sales of competing lice-treatment product, that plaintiff lost sales due to defendant’s statements, and that defendant’s ad campaign was a “for profit” campaign that attacked plaintiff’s product. • MTD denied because although defendant was a non-profit, plaintiff made sufficient allegations of for-profit activity in interstate commerce to fall within the scope of the Act.

28. Other Lanham Act False Advertising Cases (cont.) Carter v. ALK Holdings, Inc., 2007 WL 1655857 (N.D. Ga. June 5, 2007) • Alleged misrepresentations involving pending patent application do not involve a “good or service,” as required by the Lanham Act. • Statements made in patent application are not representations in connection with “commercial advertising or promotion,” as required for Lanham Act false advertising claim. • Granted MTD.

29. 4. Private Litigation Update

30. FCRA: Failure to notify consumers includes “reckless” violations Safeco Ins. Co. of America v. Burr, 127 S. Ct. 2201 (2007) • Fair Credit Reporting Act requires that companies send notice to consumers who experience an "adverse action" based on a consumer credit report. • The Supreme Court resolved a circuit split by declaring that willful failure to comply with this requirement covers not only knowing violations, but also reckless ones. • Held further that initial rates charged for new insurance policies can constitute "adverse actions" for FCRA notice purposes.

31. FCRA: Failure to notify consumers includes “reckless” violations (cont.) • Held that adverse action was “based in whole or in part” on credit report only if the "report was a necessary condition of the increase”; therefore held that GEICO did not violate notice requirement by sending no adverse action notice to an applicant to whom it offered an initial rate that was the same he would have received if his credit score had not been considered. • Court rejected position of the government and plaintiff consumers, who argued that the baseline should be “the rate that the applicant would have received with the best possible credit score” rather than the neutral score that GEICO used.

32. MI CPA exemption for regulated conduct extended to residential home building Liss v. Lewiston-Richards, Inc., 732 N.W.2d 514 (Mich. 2007). • Extends Michigan CPA exemption for regulated conduct and transactions to the residential home building industry. • MCPA exempts from its coverage any "transaction or conduct specifically authorized under laws administered by a regulatory board or officer acting under statutory authority of this state or the United States"; exemption previously applied to insurance industry in Smith v. Globe Life Ins. Co., 597 N.W.2d 28 (Mich. 1999). • Court ruled that residential home builders are exempt from the MCPA under MCL 445.904(1)(a) “because the general transaction of residential home building, including contracting to perform such transaction, is ‘specifically authorized' by the Michigan Occupational Code (MOC) . . . and relevant regulations.”

33. MI CPA exemption for regulated conduct extended to residential home building (cont.) • Builders are licensed under MOC, are regulated by state board, which oversees licensing and handles complaints, and the activity of residential home building is comprehensively defined in the MOC; A residential home builder thus “is ‘specifically authorized’ to contract to build homes.” • Dissenters argue that there is no law specifically authorizing the general transaction or conduct at issue, i.e., residential home building, and that “the specific conduct at issue ...--essentially, not completing work by the agreed-upon time, doing work that did not meet the agreed-upon specifications, and making various misrepresentations--is not conduct that is specifically authorized."

34. No Treble Damages for Willful TCPA Violation Where Statutory Damages Already Punitive Kopff v. Roth, 2007 WL 1748918 (Dist. D.C. June 15, 2007) • Court found defendant responsible for the willful transmission of 120 unsolicited faxes received by the plaintiffs in violation of Telephone Consumer Protection Act (TCPA). • Court awarded plaintiffs statutory damages of $500 per transmission, for a total of $60,000, because actual damages were negligible. • Although court found that defendant willfully and knowingly violated statute, court declined to award treble damages where the actual damage suffered by the plaintiffs were negligible and the statutory damage award was sufficiently punitive.

35. 5. National Advertising Division Update

36. NAD: Masterfoods/Dove Sugar Free Dark Chocolates • Russell Stover Candies challenged characterization of Masterfoods’ Dove Sugar Free Dark Chocolates. • Russell argued that FDA regulations have established that chocolate products must be made with specified nutritive carbohydrate sweeteners, and alleged that Dove’s sugar substitute was not among these and that ads did not comply with other FDA standards. • NAD decision did not address alleged non-compliance with FDA standards; NAD has “broader role” to ensure that ads are truthful, accurate and not misleading. • NAD found that “sugar free” and “dark chocolate” were not misleading, and appreciated voluntary commitment to modify packaging and notify consumers of fat content.

37. NAD: Bayer/Aleve • Wyeth Consumer Healthcare, maker of Advil, challenged claim by Bayer Consumer Healthcare in ads for Aleve that implied that Aleve was rated or ranked by orthopedic surgeons using objective criteria. • Ads claimed “Rated #1 for arthritis pain. Survey of orthopedic surgeons, April 2006. Comparison among leading brands of OTC pain relievers.” • Survey had asked orthopedists which pain reliever they “preferred” in treating minor arthritis; NAD found this was not the same as “rating” or “recommending” a product. • NAD recommending discontinuing ads.

38. NAD: Schering-Plough’s Lotrimin Ultra • Novartis Consumer Healthcare, make of Lamisil Defense, challenged claims in Schering’s Lotrimin Ultra ads that Lotrimin “treats” athletes foot in one week, “Nothing cures faster,” “the one week killer cure,” while stating “Lamisil Defense, four weeks long.” • NAD found performance claims to be substantiated, despite concerns that consumers might confuse treatment of symptoms with being able to cure underlying fungal disease. • Recommended modifying commercial to eliminate unsupported message that Lotrimin provides faster relief from symptoms than Lamisil, as all athlete’s foot products relieve symptoms within 1 week .

39. NAD: Expanded dietary supplement monitoring program NAD has expanded its self-initiated review of dietary supplement advertising through grant from Council for Responsible Nutrition (three such cases this month). I. GlaxoSmithKline OS-CAL supplements • Reviewed claim that “Only OS-CAL is proven to help REDUCE the risk hip fractures by 29%. *Among calcium supplements. When used as directed.” • Found that independent study supported claim, but recommended removing claim “Among calcium supplements” to avoid implication that study compared competing supplements, which it did not.

40. NAD: Expanded dietary supplement monitoring program (cont.) II. Renaissance Health Publishing “Revatrol” extract • Company published a “Natural Health News Report” that was made to appear as an editorial rather than an advertisement, and claimed Revatrol, a red wine extract and antioxidant, could “ease dozens of your health worries,” and provided a list. • NAD recommended discontinuing these claims, as the format was misleading and the performance claims were unsupported. • Allowed to continue discussion of proven claims of benefits for each specific antioxidant ingredient.

41. NAD: Expanded dietary supplement monitoring program (cont.) III. NAD: Primal Nutrition Inc. “Damage Control Master Formula” • Claimed that Damage Control Master Formula (DCMF) was the “most powerful,” “strongest” and “unparalleled” anti-oxidant formula, and that it scored the “highest known per gram ORAC (oxygen radical absorbance capacity) value of any vitamin supplement.” • Recommended discontinuing these claims because another product had a higher ORAC score, and modifying claim that DCMF had “Lab Tested #1 Antioxidant Value” to make clear that DCMF offered the highest ORAC value per dollar of available broad spectrum antioxidants.

42. Questions? Daniel S. Savrin Melissa G. Liazos